A behavioural theory of the fund management firm

Abstract

Abstract-The paper outlines a behavioural theory of the fund management (FM) firm comprising, investment decisions (at stock and portfolio levels) by teams and individuals, and of an organisation process and contextual resource factors affecting decisions. FM organisational processes interacted with resources to enhance investment team decision conditions, costs and processes. Enhanced conditions and reduced decision costs were expected to improve the chances of FM success via new information production and better quality decisions. These dynamic elements to FM firms can be interpreted as tentative organisational means to deal with major problems of behaviour, uncertainty and information asymmetry at the heart of the valuation, investment, and performance problems facing FMs. Field research was conducted in 15 FM firms during [2004][2005][2006][2007][2008][2009][2010][2011]. A grounded theory approach was employed in processing the data. This led to improvements in empirical understanding of behaviour within FM firms and markets. The results were discussed relative to relevant literature and previous grounded theory. This created a new conceptual tool to investigate FM underperformance and variety in FM styles. The paper demonstrated an empirically rich model of hierarchy, information production, capital allocation and other resource usage in financial institutions and discussed how this created further opportunities for research 1. Introduction Clarkson (1963), Holland and Doran (1998), Hellman (2000), Holland (2006) have revealed an embryonic grounded theory underlying FM structure and behaviour. This field based research has suggested that a more complete grounded theory of the fund management firm and of investment decisions making by its teams and individuals might underlie fund management behaviour. The aim was to explore this possibility with a group of with fund managers and investment team members in 15 large international fund management firms (FMs). As a result the core research question concerned the following. How do fund manager firms organise and conduct decision making to create investment value? The paper begins in section 2 with a brief summary of the literature.Section 3 discusses the research method. Locke (2001. ch.7) comments that "the presentation of grounded theories similarly follows a format that involves the telling of theoretical elements and the showing of data fragments that instance them" and this format can be outlined as: summarise the theoretical frame -serially present each theoretical element well illustrated with data instancessummarise the theoretical frame. In section 4 the 'big picture' of the behavioural theory of fund management is briefly summarised. It is briefly interpreted using the analytic framework based on a set of theories and literature relevant to the FM phenomena. The results section (5 to 9) are presented in the order; -investment decision processes -resources -organisational processes -success and failure, so as build up this 'big' picture from a micro vie...

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